Tag Archives: food cost

Are daily deal sites like Groupon good for restaurants?

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With most of these sites, you offer a gift certificate that is sold on the site for 50% off. That’s a pretty big hit already, and by itself would turn one of these deals into a money loser. To make it really expensive though, these deal sites demand 50% of the money that is collected, and expect you to pay for the processing cost of the transactions for your gift certificates.

In numbers, here is how the “deal” looks.

  • You offer a $50 gift certificate for $25.
  • Groupon keeps $12.50, you keep $12.50.
  • You pay a 3.5% processing charge on the full $50 sale, which is $1.75.
  • You net $10.75 for $50 worth of your product.
  • The customer comes in and spends $10 over the gift certificate with a net tab of $60 (if you’re lucky).
  • You run a food cost of 33% on your product meaning that the food you sold cost you $20 to sell.
  • You normally run a 30% labor cost. You think it will go down when these deals get redeemed since you are busier, but you forget to factor in your loss of revenue so your labor cost actually goes up to 40%, not down, costing you $24 in labor.

Without calculating in other costs like laundry, chemicals, wear and tear on furniture, fixtures and equipment, and every other cost of you doing business outside of the 10% of your budget that is fixed, this daily deal that netted you $20.75 in sales (thanks to the extra $10 they spent) cost you $44 to sell. That’s a net loss of $23.25 for every deal that you sell. Since most deals sell 1000+ gift certificates, you could be looking at your Groupon, Restaurant.com or LivingSocial “advertising” campaign costing you $23,000 or more.

In contrast, that amount of money could buy you a premium billboard location ad for a year, two years worth of cable TV ads or 6 months of prime network television ads, two to four years of radio advertising, two years of service from a professional public relations specialist or full page color ads in two premium magazine circulations for an entire year.

One of the “selling points” for the daily deal is that the cost is spread out so you don’t have to pay for it all at once. In truth though, all advertisers will do this for you. The daily deal sites are doing you any favors or offering you anything you can’t get from another advertising medium. What they ARE very effective at is getting customers through your door, who will likely be loyal to the daily deal site instead of your restaurant, who will tip your servers low because of their low check averages, and who you will likely never see again.

There are a few businesses that daily deal sites could be good for, but restaurants are not one of them. For some great analysis on other problems created by these sites, for both business owners and buyers of these deals, check out the following article from USA Today, based on a study by Applied Predictive Technologies…

Daily coupon deals may not work for buyers, sellers | USAToday.com

Brandon O’Dell and O’Dell Restaurant Consulting offer operations and marketing consulting for independent restaurants, private clubs and food services. Learn more at www.bodellconsulting.com.

Are you taking advantage of low lobster prices? | O’Dell Restaurant Consulting blog

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Lobster prices | NPR.orgWhen prices move significantly on food, it usually worries restaurant owners. There are times when prices going down OR up can offer you a good opportunity to earn extra revenue though.

Currently, Maine lobster prices are tanking. There has been a glut of Maine lobsters caught this year and prices for lobsters on the East coast have hit a record low. While a restaurant owner might normally think “prices are down, that’s great for me“, it can be a double edged sword. You do not want prices on your already low priced products going down, especially if those products make up a large portion of your sales. While initially you may earn more money from lower recipe costs from those items, eventually your customer is going to want some of those savings passed on to them. When you do decide to drop your prices or offer featured items with these low priced ingredients, what you might experience is a skewing of your product mix to those lower priced items. This can actually canabalize sales of other items that may have a higher food cost percentage, but also likely contribute more gross profit dollars to your bottom line. That means less money in the bank.

Low lobster prices are a different story. When typically high priced food items drop in price, they allow you to lower your prices and skew your sales mix toward those items. Even though those items cost less than they normally do, the lobster is probably still going to be higher priced than your average sale and contribute more gross profit dollars than your average item sold. This represents a huge opportunity to improve both sales and profitability. By offering a lower price on lobster, your guests perceive that they are getting an incredible value so more of them order the lobster. Your average ticket goes up and so does your average gross profit per item sold. Win for you and a win for your customer.

O’Dell Restaurant Consulting offers operations and marketing consulting for independent restaurants. Visit www.bodellconsulting.com for more information.

Positive outlook for restaurants in 2012, or is it?

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Here’s an article from Nation’s Restaurant News about sales predictions for 2012. According to the study, everything is looking rosy. The question to you is, “Since this study only contains data from the Top 500 largest chains, does this study suggest restaurant sales overall are going up 3.4%, or does it suggest that independent restaurant competition is weakening for the chains and they are taking a larger marketshare of the consumers budget?”

Since this report also recognizes that most the previous and expected gains have been in quick service restaurants, it suggests that consumers are still being careful with their dining dollar, looking for value in quick casual restaurants instead of full service restaurants. Time will only tell what the real deal is. I tend to trust studies that include a large sampling of independent restaurants. They are a better indicator of the overall market and health of the industry in my opinion.

Restaurant sales rose 3.4% in 2011 | Nation’s Restaurant News.

To help organize your restaurant systems so you can compete with the chains, visit www.bodellconsulting.com.

A look at today’s consumer | Nation’s Restaurant News

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An article about restaurant consumer demographic data from the National Restaurant Association’s Annual Report. Make sure to read all the pages…

A look at today’s consumer | Nation's Restaurant News.

Are Mom and Pop Restaurants a Thing of the Past « Culinary Career Research Center | How to Get Into Culinary School | Culinary Admissions & Financial Aid Info

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Are Mom and Pop Restaurants a Thing of the Past « Culinary Career Research Center | How to Get Into Culinary School | Culinary Admissions & Financial Aid Info

How do you control food and liquor costs?

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This is probably the most often asked question by restaurant owners, managers and chefs. If you are smart enough to be calculating your actual food and liquor costs by performing a physical inventory, then you are half way there.

This article will discuss a very important part of controlling food and liquor costs, one that most restaurants do not do. To many of you, this will be new information. To many others, this is something you’ve heard myself and others talk about, but have never known how to actually perform the task. This article is about ideal costs, why they’re important, how to calculate them and what to do with the information.

What are ideal costs?

Ideal costs are the dollars that the product you’ve sold should have cost you to sell. They tell you that if you’ve sold 20 hamburgers and 10 steaks, that it should have cost you “x” amount of dollars.

Why are ideal costs important?

Ideal costs are important because they give you a scale to measure your actual food costs against. When you perform a physical inventory at the beginning of a period and calculate it’s value, add your purchases for the period, then subtract the value of your physical inventory for the end of the period, you are calculating your actual costs. This is the amount of dollars the food you sold during that period actually cost you to sell. This number is imperative to know if you want to control your product costs. However, most operators make the mistake of using this number all by itself to determine if they have cost problems. They only compare it against a budgeted cost percentage. With only doing this, there is absolutely no way to know if your actual cost is good or bad, only that it is higher or lower than some arbitrary budget number. It’s relativity to the budgeted number does you no good because your budget number does not take into account your sales mix. If you set your budgeted food cost for example, at 35%, and your actual cost is 40%, many chefs/managers/operators will assume there is a problem with the costs. The error with this assumption is that a simple change in your sales mix could have created this variance, and there may be absolutely no problem with waste, theft or any other issue. As a matter of fact, what you’ve experienced could be a desirable situation where you’ve sold a higher number of high cost percentage, high gross profit menu items during that period. This would cause your actual food cost to be higher, but it will also drive your profit higher, creating a situation where you might actually reprimand your staff for doing something good! After all, you’d rather sell 5 steaks that cost $10 and sell for $20 ($50 gross profit) than you would 5 hamburgers that cost $2 and sell for $8 ($30 gross profit), wouldn’t you?

How do you calculate ideal costs?

To calculate ideal costs, you need to know how much your menu items cost to make, whether they are food items, liquor drinks or beer (luckily the recipe for a bottle of Bud is pretty easy to cost out). This requires that you make recipes for all your food items, and calculate costs per pour for all your liquor and tap beer. Bottle beer costs what you buy it for. If you know how, liquor and beer costs can be calculated right in your inventory spreadsheets. I have spreadsheets that make these calculations automatically when you enter in bottle and keg costs, in addition to pour sizes. Food items should have a recipe spreadsheet created for each of them. To make recipe calculation easier, you can link recipe spreadsheets to your inventory spreadsheets which will update your costs as you update your inventory prices. If you don’t know how, just do the math by hand and update your recipe costs at least every six months, or you can email me at brandon@bodellconsulting.com to help you.

Once you know what every item you sell costs you, you have to track how many of each item you sell. I suggest using a spreadsheet to track these numbers to keep things organized. When you know how much of each item you sold for a period, and you know how much each of those items cost you to sell, you can multiply those two numbers together to come up with an ideal cost for those items sold. This is what those items should have cost you to sell.

What do you do with all this information?

When you calculate your ideal costs for a period, and you also have performed a physical inventory and calculated an actual cost for the same period, you have the information to truly control your product costs. Convert your ideal costs to a cost percentage by dividing your ideal cost by your sales for the period. Convert your actual costs to a cost percentage by dividing your actual cost by your sales for the period. Compare these two percentages. There should be no more than a 1.5% difference between the two. The smaller the better. If you have a larger variance, you know that you have product getting wasted or stolen, unless there is an error in your calculations. Without using ideal costs to compare actual costs to, you may think there is waste or theft when there isn’t.

Comparing ideal and actual costs is an incredibly powerful cost control tool for your business. You can learn to know when you have a problem, or when you just may need to raise prices.

Not every operator, chef or manager has the ability to create the spreadsheets necessary to calculate ideal costs. To save you time and provide you with a cost control tool that can save you thousands of dollars, I’ve already created this tool. You can visit my webstore at http://www.bodellconsulting.com/webstore.html to find a downloadable file with spreadsheets for tracking your sales by item and calculating not only your ideal food costs, but also your ideal liquor, beer and tobacco costs. If you need help setting up your spreadsheets, you can reach Brandon O’Dell at 1-888-571-9068 to purchase telephone consultations.

Spreadsheets for calculating ideal food, liquor, beer and tobacco costs

If you would like to purchase the Ideal Food, Alcohol and Tobacco Tracking Spreadsheets directly, just follow this link. We process payments through Paypal. If you do not have a Paypal account, simply follow the “continue” link next to the credit card icons on the bottom left of the page:

Daily sales by item and ideal cost spreadsheets

Buy Now

Brandon O’Dell
O’Dell Restaurant Consulting
www.bodellconsulting.com
1-888-571-9068
brandon@bodellconsulting.com

How can I use gross profit pricing for a new restaurant?

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When opening a new restaurant, you are going to have to make assumptions about all your expenses and your head counts regardless of whether or not you price by gross profit. Since you will already have those assumptions, it only makes sense that you set prices so that you will collect enough markup (gross profit) from each of those assumed customers to cover all the expenses you are assuming.

 

Since you won’t have “real numbers” to work with in your startup, it will be important that you create your budgets conservatively. Set realistic expectations for traffic and for expenses, based on your/your advisor’s experience and averages in your area. You’ll need to be doing all this regardless of whether or not you price by gross profit. Pricing by gross profit simply guarantees that if you bring in the customers you assumed, and you keep your expenses down to where you assumed, that you will at least make the profit you budgeted for.

 

Without pricing by gross profit, you are simply guessing at whether or not there will be enough markup to cover your expenses. Pricing by a budgeted cost percentage doesn’t take into account the other expenses of the restaurant.

 

In short, budget conservatively and use your assumptions on customer counts and expenses, along with accurate recipe costs to price by gross profit in a startup.

 

Brandon O’Dell

O’Dell Restaurant Consulting

web:  www.bodellconsulting.com

blog:  http://blog.bodellconsulting.com

email:  brandon@bodellconsulting.com

office:  (888) 571-9068

Does this franchise restaurant have too high of food costs?

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Is the cost of food and supplies less when you own a franchise because of their buying power, or the same, or even more because of kick-backs from suppliers?

The franchise I am looking at shows cost of goods to be from 34% – 38%.
This sounds a little high to me. Is this what the norm is in this industry?

It all depends on the menu and prices. If you’re evaluating a potential franchise purchase, the food cost percentage is the last thing you should be worried about. Percentages don’t equal profit.

You should be concentrating more on the average profit and investment, how large the investment is, how fast that profit will earn back your investment, and whether that profit makes the investment worth your time.

Franchises do normally have increased buying power. Whether that results in a lower food cost percentage depends on the pricing, not the purchasing.

There is no “norm” for the industry. Some operations make a profit with 45% food costs, some need to be under 20%. Achieving either one doesn’t mean either will even make a profit. The profit is made with the money that is left over AFTER you pay for the food. While operating efficiently, and not wasting product is important to profit, the importance of running a particular food cost percentage is grossly overstated in the restaurant business.